Hangzhou Electronic Soul Network Technology (SHSE:603258) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Hangzhou Electronic Soul Network Technology (SHSE:603258) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hangzhou Electronic Soul Network Technology:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.022 = CN¥49m ÷ (CN¥2.7b - CN¥452m) (Based on the trailing twelve months to September 2024).

So, Hangzhou Electronic Soul Network Technology has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 5.3%.

See our latest analysis for Hangzhou Electronic Soul Network Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hangzhou Electronic Soul Network Technology's past further, check out this free graph covering Hangzhou Electronic Soul Network Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Hangzhou Electronic Soul Network Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.2% from 8.8% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Hangzhou Electronic Soul Network Technology's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Hangzhou Electronic Soul Network Technology, we've spotted 4 warning signs, and 1 of them is significant.

While Hangzhou Electronic Soul Network Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.